Should Employers Get Out of The Retirement Business?

With workers struggling to adequately save for retirement and the changing nature of the employer-employee social contract, some experts say companies should get out of the retirement business altogether — while others say employers still have a valuable role to play.

American workers struggle to save sufficiently for their retirement. Should their employers be doing more or less to help them?

Savings in 401(k)s and Individual Retirement Accounts lost much of their value during the 2008 financial crisis and ensuing recession before recovering mightily during the current bull market. Still, many workers don’t have enough saved for retirement; the retirement savings deficit is between $6.8 and $14 trillion, according to the National Institute on Retirement Security. What’s more, the median savings for all working-age households near retirement is just $12,000.

Most companies offer workers some sort of retirement savings option, with many helping by way of matching a portion of the contributions made by their employees. Still, 48 percent of workers lack the option of contributing to retirement accounts through the workplace. And as the traditional employer-employee social contract continues to evolve, some experts say the notion that employers need to play an active role in saving for workers’ retirements is wearing thin.

Companies Shouldn’t Be Involved

“In my view, we should shut the whole thing down,” said Laurence Kotlikoff, professor of economics at Boston University and a research associate at National Bureau of Economic Research and president of Economic Security Planning Inc., a personal finance software company based in Boston.

Kotlikoff is calling for companies to get out of the business of their workers’ investments entirely. In fact, this was a big part of his platform when he ran for president of the United States in 2012 and 2016 as a write-in candidate. His platform called for a replacement for the entire retirement system, doing away with 401(k)s, IRAs, social security and other arrangements. Instead, Kotlikoff proposes a global index fund run by a computer, which would invest money around the world. Once a person reaches retirement age, they could withdraw in a similar fashion to a 401(k).

John Friedman, associate professor of economics at Brown University, echoed this sentiment. “A business is not responsible for making sure that its employees take out the right home mortgage. A business is not responsible for making sure that their employees have personal credit cards that are appropriately used. These are personal finance decisions,” Friedman said. The same goes for retirement savings choices. He feels business leaders should make it easy for workers to save, while putting fiduciary responsibility, liability and regulatory burdens on financial institutions, which have expertise in retirement systems.

His proposal, outlined on The Hamilton Project’s website, is for Universal Retirement Savings Accounts. “Congress should amend the tax code and the law governing employer-sponsored retirement accounts to replace all existing tax-advantaged retirement savings plans with a single account type,” the proposal reads. Employees would contribute part of their paycheck to it, and employers could also match contributions. Having this centralized system would simplify the process of switching jobs, as the USRA would be a single place for their retirement account, requiring no movement of money when changing employers.

This viewpoint may be a welcoming one for startups, Kotlikoff said. When starting a new company, considering retirement plans is often the last thing on a business leader’s mind. Startups have to focus on getting the business up and running. Moreover, they often lack the expertise on the complexities of retirement and it’s a liability for them if they get it wrong.

These small companies can also find it hard to expand and compete with large employers when they lack retirement benefits, Kotlikoff said. To compete for employees, they must go through the exhausting, complex process of figuring out this element of their employees’ compensation.

If businesses didn’t have to consider this system at all, they would have more time to focus on day-to-day operations. “They [startups] would be delighted, I think, not to have to deal with these problems, these issues. They would be able to get back to their real job, which is to make goods and services and to sell them,” Kotlikoff said.

Companies Should do More

Many experts say employers still have a valuable and appropriate role to play in workers’ retirement savings.

“The private sector has helped to innovate and establish the 401(k) plan as a plan that most people feel strongly about and has helped many workers achieve retirement security,” said Kathleen Beichert, head of retirement and third party distribution at OppenheimerFunds Distributor Inc., an investment firm and asset management firm based in New York City. “To say it’s not working and we move to something else just seems really misguided to me.”

She recognizes that many people haven’t sufficiently saved for retirement, but business leaders are working to help them. More than half of 401(k) plans automatically enroll participants, and some increase employee contributions as their salaries rise. This simplification increases the share of people saving and the amount that they save. According to the Bureau of Labor Statistics, automatic enrollment in 401(k)s has led to a 48 percent increase in new-hire participation at one large U.S. company.

Workplaces can also offer education on retirement and financial wellness, while having professionals manage the retirement accounts, and large employers have the luxury of lower investment fees than one would have on their own, individual plan, Beichert said.

There is also a business case to be made for helping workers save for retirement. Older workers cost companies more money, as they tend to have higher wages and health care costs than younger employees, Beichert said. And as they reach retirement age, those who haven’t saved are likely to be distracted at work. “Business is better when employee morale is high and productivity is high and people are not undergoing financial stress and people are not working beyond when they would like to stop working,” Beichert said. “Companies need to pay attention and invest in these financial wellness programs that are designed to help employees save at appropriate levels to retire when they would like to retire and to retire with dignity.”

Thus, having retirement plans designed to encourage participation need to be considered against the liability that companies have when they are filled with workers who lack savings. “Regardless of how mobile workers are today, [the workplace is] probably the best place to offer retirement plans,” Beichert said.